Tidewater Midstream and Infrastructure Ltd

TSX:TWM

Good afternoon, ladies and gentlemen, and welcome to the Tidewater Midstream and Infrastructure Limited Q1 2025 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 8, 2025. Now I would like to turn the call over to your first speaker today, Michael Gracher. Please go ahead, sir.

Thank you, John, and welcome, everyone, to Tidewater Midstream's First Quarter 2025 Results Conference Call. I'm Michael Gracher Manager, Investor Relations, and joining me today are Jeremy Baines, CEO; and Aaron Ames, Tidewater Midstream's Interim CFO.

Also with us and available during the question-and-answer session is Shawn Heaney, EVP, Finance and Strategy; and Ian Courley, VP, Finance.

Before we begin, please note that matters discussed on the call include forward-looking statements under applicable securities laws with respect to Tidewater Midstream and Infrastructure, including, but not limited to, statements regarding investments and acquisitions by the company, commercial arrangements of the company, the business strategies and operational activities of the company, the markets and industries in which the company operates, cost and expense management, the company's leverage and plans for debt and leverage reduction, refinancing of the company's indebtedness and the value of the company's assets and the future growth objectives, targets and financial and operating performance of the company and its businesses. Such statements are based on factors and assumptions that management believes are reasonable at the time that they were made and information currently available.

Forward-looking statements we may express or imply today are subject to risks and uncertainties, which can cause actual results to differ from expectations. Further, some of the information provided refers to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures, please see Tidewater Midstream's financial reports, which are available at www.tidewatermidstream.com and on SEDAR+.

And with that, I will now pass the call over to Jeremy to go over the quarter.

Thanks, Michael, and thanks to everyone for joining us today. Q1 was a difficult quarter as a result of wider discounts on refined products and producer shut-ins affecting our Midstream operations. We remain very focused on improving our cash flow and operating results. To this end, a few days ago, we announced an agreement to purchase the North segment of Pembina's Western Pipeline. Western Pipeline is a 377-kilometer crude oil pipeline originating in Taylor, British Columbia and terminating at our Prince George Refinery. The Western Pipeline is the key transportation conduit tying the Prince George refinery into the Northeastern British Columbia crude supply region.

As part of the transaction, Tidewater and Pembina will enter into an interconnection agreement upon closing, which will allow Tidewater to continue to access existing crude sources at the terminal located in Taylor, British Columbia for the next 25 years. This is expected to provide PGR with a reliable and lower cost source of feedstock compared to historical operations. At PGR, throughput averaged 9,936 barrels per day, which was 9% lower than Q4 2024 and 20% lower than the first quarter of 2024. The decrease for both periods was largely due to third-party facility and pipeline maintenance that decreased the volume of crude feedstock coming into the facility as well as inventory management. Throughput is expected to return to normal levels over the course of the year. HDRD had an average throughput of approximately 2,239 barrels per day compared to 2,116 barrels per day during the same period in the prior year and 2,677 barrels per day during the fourth quarter of 2024. While utilization was relatively consistent with the first quarter of 2024, the decrease from the fourth quarter of 2024 reflects excess supply of refined products in Western Canadian market, somewhat muted demand and inclement weather affecting rail logistics.

As previously noted, during the fourth quarter, the 5-year offtake agreement with Cenovus, which provided the sale of the majority of refined product volumes for PGR expired, and the company has now transitioned to marketing all refined products produced at both the HDRD and PGR facilities in-house. Whilst Tidewater has made significant progress in marketing its diesel and gasoline volumes, Current market discounts are significantly wider than those at the time the Cenovus offtake agreement was entered into, largely stemming from the oversupply of diesel in Western Canada. We have taken steps to improve our cost structure, including the recently announced acquisition of the Western Pipeline, and we are focused on improving our utilization.

We also expect that the BC government's changes to the Low Carbon Fuels Act will continue to provide over time, improved refined product margins for our Tidewater Renewables HDRD facility. On May 5, 2025, the Canadian International Trade Tribunal issued a decision to terminate its preliminary injury inquiry in respect of Tidewater Renewables countervailing, anti-subsidy and antidumping duty complaint relating to imports of renewable diesel from the United States. While we are disappointed with the Tribunal's decision, Tidewater Renewables remains committed to free and fair trade in Canada's renewable diesel market. Our view remains that the facts support a finding that unfair trade practices by the United States have caused the flood of subsidized and dumped renewable diesel into Canada. This flood of imports has significantly injured Tidewater, currently the sole Western Canadian producer of renewable diesel.

Tidewater Renewables is carefully reviewing its options in respect of the tribunal decision with the support of its external trade law council. Upon receipt of the tribunal reasons expected on May 23, the corporation will assess all available options and legal remedies, including, but not limited to, promptly filing an amended or new complaint with the CBSA. In spite of this hopefully temporary setback to our trade case, we have seen significant improvement as a result of Canadian renewable blend requirements as part of the new BC LCFS regulations, along with California LCFS and D4 RIN prices increasing the import parity price of U.S. renewable diesel available into the British Columbia market. This has seen a significant increase in our margins at our facility, and we expect this to hold for the rest of the year.

On the Midstream side of the business, the Brazeau River complex operated exceedingly well. The BRC gas processing facility had throughput of 94 million cubic feet a day in the first quarter of 2025, 38 million cubic feet a day lower than the fourth quarter of '24 and 40 million cubic feet per day lower than the first quarter of 2024. The lower throughput was primarily due to lower straddle volumes coming through the facility as a function of an outage at Plant 3 of the facility and the discontinuation of our sour gas processing after the second quarter of 2024. We are seeing increasingly positive demand for processing capacity in the area and hope to be able to make some announcements later in the year on that front.

As we discussed at year-end, gas processing activities at the Ram River gas plant have been temporarily curtailed with sulfur handling activities continuing to be operational. We continue to focus on controlling costs at the facility with the intent to restart the facility as AECO pricing improves and produce restart operations. We also continue to remain focused on our liquidity, and we have made great progress on noncore asset sales and deleveraging. On March 25, 2025, we announced that the company completed the previously announced sale of the BRC Roadway network for total proceeds of $24 million, of which $22.5 million was received and used to repay outstanding debt. We also continue to advance our noncore asset sales programs, and we'll update the market as progress is made.

Before I turn the call over to Aaron to go through our financial results, I wanted to let you know that effective May 18, 2025, Aaron will be stepping down as interim CFO due to personal circumstances. On behalf of myself, the Board of Directors and Tidewater, we would like to give a great big thank you to Aaron for his dedication and hard work helping the corporation progress its strategy during his tenure. The Board of Directors will be conducting a comprehensive search to identify and evaluate internal and external candidates for the role of Chief Financial Officer. With Aaron's departure, Ian Courley, currently Tidewater Renewables Chief Financial Officer and Tidewater's Vice President of Finance, will be appointed Interim Chief Financial Officer effective May 18, 2025. Aaron will remain with the corporation and serve as special adviser to the CEO to ensure a smooth transition of responsibilities until June 13, 2025. Ian will also continue to serve as Tidewater Renewables' Chief Financial Officer, an office he has held since May of 2024.

I will now turn the call over to Aaron to go through our financial results.

Thank you, Jeremy. Consolidated net loss attributable to shareholders was $31.8 million during the first quarter of 2025 compared to a net loss attributable to shareholders of $11.3 million during the first quarter of 2024. The increase in net loss attributable to shareholders was due to lower refined product sales and lower product margins, offset in part by lower depreciation, interest expense, favorable change in the fair value of derivative contracts and higher income from equity investments. Consolidated adjusted EBITDA was negative $3.7 million during the first quarter of 2025 compared to $39.8 million during the first quarter of 2024. The decrease in EBITDA is primarily driven by lower refined product sales and lower product margins in the first quarter of 2025, offset in part by favorable changes in the fair value of derivative contracts and higher income from equity investments.

I'll now ask John, our operator, to open the call up for questions.

We now have our first question, and this comes from Patrick Kenny of National Bank Financial.

Jeremy, wondering if you could provide an update on your noncore asset sale program for the year. I believe you were looking at around $100 million or so of opportunities. Just curious if these processes are still live given the macro uncertainties facing potential buyers out there right now. And overall, how would you say that the pace of executing the program is tracking relative to your initial expectations coming into the year?

Yes. I mean, obviously, we are very successful with the BRC roads. The process continues. We are making progress. We can't comment on any of the ongoing potential transactions until they're announced, and we'll do that at the appropriate time. But we're still on track to that $100 million, inclusive of the BRC roads.

Okay. And then I guess, outside of noncore asset sales, just given the uncertainty around the direction of commodity prices through the summer and the back half of the year. Curious if you can comment on what other sources of liquidity you might be looking at, what other levers might be available to help bridge the gap if needed, just until better market conditions resume from an operating cash flow perspective.

Yes. I mean, obviously, there's asset sales. And like I said, we'll announce some of those as we go. We also have built up a significant inventory of BC LCFS credits at what is now a relatively attractive price to the current market we're seeing. So we have some leverage there. Obviously, we continue to sell inventory that we built up during the first quarter at the PGR facility, and we're actually -- we're moving significant barrels. Our sales have increased significantly every month since the start of the year. So we continue to generate liquidity that way. So -- and always being a prudent operator, managing cash flows, looking at every single source of revenue and cost and continuing to manage that way.

Got it. And then last one for me, just on the acquisition of the Northern segment of the Western pipeline. I appreciate the OpEx savings guidance there. But just wondering what the ownership of the system might do to the -- to your run rate maintenance capital program. I believe Pembina had cited the need to invest over $300 million or so on in-line inspections and other maintenance projects over the next 10 years. So just wondering if this aligns with your assessment and whether or not a $30-plus million per year increase to your run rate maintenance capital program is a reasonable assumption.

Yes. So let's talk about the pipeline and glad you raised that. Obviously, we see Pembina as a good operator. The pipeline is younger than TMX, younger than Line 1, I think Line 2, Line 3, and it's about average age for liquids pipelines in North America. Pembina has been a good operator and done good maintenance on it. But over the last more than 8 years, Tidewater and predecessors have funded the complete integrity and maintenance program that Pembina has undertook on the pipeline, OpEx and maintenance, plus a capital fee of $10 million a year over the last 3 years. So that $10 million is clearly going to go away.

The second point is this pipeline wasn't core to Pembina, and we think we're better aligned with the pipeline and how it will be run. We expect to continue to see run rate capital over the 10 years similar to what we've been spending in capital, I'm talking OpEx, integrity spending and CapEx. And we've got a detailed 10-year plan. We're not the owners of the pipeline yet, so we haven't released it, but we do expect we'll be able to continue to do it at a cost-effective level. And hopefully, given our alignment, maybe be able to do it a little bit lower cost than Pembina. Obviously, they've been getting effectively a risk-free significant return on the pipeline because they weren't responsible. They didn't bear any of the costs. We paid them all, and we'll continue to do that to make sure we run safely and with proper integrity as we go forward.

Okay. Sorry, just to clarify, the OpEx savings there, the $10 million to $15 million, that's inclusive of the maintenance capital program that you expect to spend?

Yes.

And the next question comes from Rob Hope from Scotiabank.

I was hoping you could add a little bit of color on the quarter-over-quarter deconsolidated EBITDA walk moving from, we'll call it, 14% to minus 6%. Like if we think about the key drivers there, lower volumes on the gas side, lower volumes on the refined product side, weaker margins. Are you able to give us maybe a little bit more clarity on how much each of those factors impacted results as well as the go-forward outlook there?

Yes. So we didn't -- it's not in the -- we didn't disclose that. But as you said, it was as a result of lower volumes and lower margin. We do expect on a go-forward basis that the volumes and margins will improve. The first quarter was just a relatively more difficult operating environment. And going forward, though, beginning in Q2, we expect that to start to see some improvement there.

All right. That is helpful there. And then can you maybe just talk about what you're seeing in terms of spreads for the refined product business there as you're marketing it yourself? Is that improving? And was that weaker than expected in Q1 there as well?

Q1 had fairly low crack spread. It has improved towards the end of Q1 and continues to sit about $85. Aaron mentioned the differentials have been a little bit wider. We think the market is slowly starting to tighten up on that front. We took over the marketing in November of last year, we've been broadening our customer base. We went from one significant customer to -- with a handful of customers to now servicing 30-plus customers, and we continue to grow that roster of customers and optimize the margins, and we're making good headway on that front.

The next question comes from Maurice Choy from RBC Capital Markets.

I just want to come back to the Western Pipeline system. Maybe just more broadly, are there any other similar investment or cost-saving opportunities like this that you've been interested in doing? Or is this one where the deal came about in a rather unique way and it's not replicable?

Like I mean, this deal, obviously, this is a very strategic asset for us and is important to our Prince George Refinery. We've got some other things that we're working on that are interesting, smaller type tuck-ins. I mean this is unique in that it is a strategic asset to us for our refinery, noncore to Pembina. And we're always looking for opportunistic opportunities to deploy capital at a good return.

And do you see these tuck-ins needing to be married from a timing and funding perspective with the noncore asset sales program?

Yes. We -- I mean, our #1 focus is liquidity and reducing leverage. And it's a pretty high bar return hurdle that -- for us to do things like this. So we'll continue to monitor that and make sure we make the right moves on that front.

Understood. And if I could just finish off with a more broad market commentary here. Given the lower commodity price environment, how would you characterize your demand for utilities? Any thoughts about the throughput in the coming quarters?

Yes. We see ourselves increasing throughput as we go forward. This was a tough quarter on that front. We do see significant opportunities around the Brazil facility to add volumes and contract extensions and so forth at that facility. So we are seeing some positives there. Hopefully, with LNG Canada, we see some of the dryer gas become a little more profitable for producers, and we see some activity on that front as well.

And the next question comes from Robert Catellier from CIBC Capital Markets.

I wondered if you could just provide a little bit more of an update on the offtakes at PGR. Is this a situation where you expect to eventually sign medium or longer-term agreements? Or do you expect to be a little bit more month-to-month on your sales portfolio going forward?

Yes. I mean it's a good question, Rob. Obviously, under the right terms, we would sign term agreements if they're available in the market. It's not -- I would say the offtake agreement that was signed with Cenovus when the facility was -- or when the facility was purchased is atypical of of the refining, we typically do sort of 1- to 3-year deals with -- we try to get minimum liftings in them. But that's just the nature of the refined products market. And we -- so it's been a -- you can imagine, it's been a big transition from invoicing one customer to 30-plus customers over time. And we're moving there, and we're starting to see some more strength in demand as we're reducing our inventory.

Okay. Understood. And then just on the feedstock cost, I think there was a comment in the quarter about you had to process some higher density feedstock costs. Could you explain what happened there and the outlook for feedstock going forward in Q2 and beyond?

Yes. Like it was just one of those circumstances where producers' upstream activities, we had some producer -- or producer that -- we had some offline as they're increasing their production, and we had another producer who put some further processing that took some of the light ends off. And it just -- it's all a big pool that comes together in the tank before it comes to us. And so some of the -- historically, it's been getting lighter and it got a little bit heavier based on what happened there based on -- like we buy from multiple producers and it all gets put together.

So we think it's behind us, and there's actually going to be some more feedstock becoming available here shortly with some new programs that are just being completed. So I think it's temporary to the quarter. It did happen -- before Tidewater owned the facility, there was a bit of an increase in shortly -- short-term increase in density for a while with things like this. And so it takes a little bit of time for us to readjust the refinery and so forth and be able to process it properly. So it does change the yields a little bit as well. So we think it's behind us, but we're working on it for sure.

And there are no further questions that came through at this time. I'll now hand the call over back to Michael Gracher for closing remarks. Please go ahead, sir.

Thanks, everyone, for joining the call. The team is available to address any outstanding items with the contact information at the bottom of this morning's press release. Thank you.

Thank you. This concludes our conference call for today. Thank you all for participating. You may now disconnect.